#10. LONG VIEW: Why Is China Pursuing "Common Prosperity"?
Read Time: 5 min
This is LONG VIEW, one of two of our weekly columns. We are a pair of finance professionals with boots on the ground in China, each with 10 years of experience in the country. If you like what we are doing please subscribe 👇 or share it with a colleague or friend.
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Contents:
Today we’re covering inequality. The charts you’ll see:
Income percentiles
Wealth percentiles
Private & public wealth ratios
House affordability ratios
Global Gini coefficient
Poverty lines over time
China urban-rural divide
The setup:
China’s leadership is advancing “Common Prosperity” as an overarching policy objective. Throughout history the Chinese state has advocated stability as a core value (interesting but dense read here: “1587, a Year of No Significance”). And the current Party likely sees recent inequality trends as threatening this stability (opinion).
They’re not necessarily wrong. A widely cited IMF paper (~1,200 citations) demonstrated that there is an inverse relationship between the income share accruing to the top 20% and economic growth. The study used data for 159 advanced, emerging, and developing economies for the period 1980–2012. Countries may just be easier to manage when the whole pie is growing.
From the IMF:
If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth. This positive relationship between disposable income shares and higher growth continues to hold for the second and third quintiles (the middle class).
So that’s the setup. Now let’s make some charts!
1. Income percentiles
We start with a long view of the three countries for which we have the longest time series available.
France visibly defends the bottom 50% ever since WWII. Russia is back to tsarist inequality levels with the collapse of the USSR in the 1990s. The US is clearly trending up after the Reagan reforms in the 1980s, nearing pre WWII levels.
And here’s a more recent take 1970-2015 on a selected basket of countries.
Notably, China’s bottom 20% share actually declined, whereas in many other countries it at least stayed steady.
2. Wealth percentiles
Prior to 1980s, China was equally poor. Then Deng uttered: “Let some of the people get rich first.” And that’s what happened.
In terms of wealth ownership, China’s top 20% rockets up, especially around the 2007 financial crisis but then hits a soft ceiling in the 2010s. The inequality data only goes to 2015 and there may have been developments since then but we just don’t have the data yet.
3. Private & public wealth ratios
As most countries turn into market economies, private wealth creation follows.
Some notable case studies. Japan’s public wealth to national income declined. Its private wealth has stayed flat ever since the start of the “lost decades”; arguably it’s a country in stasis. Norway’s public wealth to national income is probably driven by their national oil fund.
4. House affordability ratios
Now we come to the very heart of the inequality matter for China. House affordability. It’s non-existent.
And here’s China’s housing in context in terms of valuations:
Most home buyers are increasingly second- or third-time purchasers.
Home prices have been a major driver of wealth creation in China. Remember this nominal home price growth chart from a previous post.
Rising home prices help reduce mortgage servicing burdens, but it also prices out would be new homeowners. In China, homeownership is frequently a requirement for marriage and family formation.
China’s real estate sector is the centre of gravity for many issues: wealth inequality, debt, demographics. We will be watching carefully, stay tuned.
5. Global Gini coefficient
The Gini coefficient is one of the most popular ways of measuring income inequality (0 when everybody has the same income and 1 when one person has all the income).
However, the chart above demonstrates that behind the seeming stability of the global Gini there are things happening below the surface.
6. Poverty lines over time
With all the talk about increasing inequality, let’s not forget that China has pulled 800 mln people out of poverty, all within its own borders.
7. China urban-rural divide
China’s officials place a lot of emphasis on narrowing the urban-rural divide, especially as urbanisation leaves the older generations in the countryside.
There’s clearly a divide between the two. On a side note, rural residents are not able to sell their property or use it as collateral like the urbanites can (different policy treatment).
What about percentiles for each category? Urban vs rural.
Looking within each category, the rural population is actually more unequal in terms of income than its urban counterpart (note the bigger gap between red and green lines for rural China).
Final thoughts. Inequality is obviously a difficult theme to write about well. As with any LONG VIEW issue, our aim is to compare and contrast and look for some nuance.
Thank you for reading. If you like what we are doing please subscribe or share it with a colleague or friend.
Sincerely,
China Charts Team
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